Don't Expect Double-Digit Stock Gains in 2022

Despite expectations for rising rates in response to rising inflation, the outlook for the global stock market in 2022 is positive.

One early indication of this: U.S. stocks rallied Wednesday after the Federal Reserve announced it was speeding up the wind-down of its asset purchases, now expected to end in March 2022 instead of June, and Fed policymakers indicated a preference for three rate hikes next year, up from one or two hikes that strategists expected previously.

U.S. stocks are generally expected to lead other developed markets in 2022 despite their richer outperformance this year and resulting richer valuations. Forecasts for strong economic growth and healthy earnings are expected to underpin U.S. stock performance next year.

Earnings are seen as “the primary driver of returns as the U.S. equity market continues to grow into its above-average valuation,” according to J.P. Morgan Asset Management. But dividends and buybacks, which some companies suspended in 2021, will also provide support, according to Alan Berro, an equity portfolio manager at Capital Group.

“Dividends have come back in fashion,” said Berro in a recent outlook webinar. “Many companies have surplus capital that will be redeployed as regular and catch-up dividends and endorse share repurchase.”

Despite the favorable outlook, U.S. stock market gains in 2022 are not expected to come close to this year’s gains, which are already around 25%. They are expected to remain in the higher single digits.

Northern Trust, for example, is forecasting an 8.6% return for U.S. stocks, 7.7% for European equities and 8.8% gains for emerging market stocks, but it has an equal weight rating for EM equities versus 5% overweight for developed market stocks due to headwinds from Chinese economic and regulatory policy and COVID-related risks.

China accounts for about 40% of the MSCI Emerging Markets Index, according to Gabriela Santos, global market strategist at J.P. Morgan Asset Management.

“China will seemingly prioritize financial stability over growth — opting for targeting (not aggressive) stimulus,” according to the Northern Trust outlook.

“The time for emerging market equities will come when the cyclical momentum happens,” said Wei Li, global chief investment strategist at the BlackRock Investment Institute (BII), in a BlackRock outlook webinar. “That time is not now.”

Outlooks for growth versus value and large-cap vs. small-cap stocks vary among market strategists, but there is general agreement that cyclical sectors will outperform in 2022 as their earnings rise, especially among industrials and financials — the latter also supported by rising rates. Some strategists, like David Lebovitz, global market strategist at J.P. Morgan Asset Management also like health care and tech stocks.

Several themes run throughout most market outlooks for 2022:

• Inflation will stay higher for longer but retreat as the year progresses and supply chain bottlenecks unwind, but wage pressures will continue to be felt globally.
• Volatility in the global stock market will remain elevated throughout much of the year.
• Global growth in 2022 will be slower than in 2021.
• The trajectory of the COVID pandemic remains a wild card, especially given the latest more contagious though not necessarily more lethal omicron variant.
• Labor force participation will be a key indicator to watch to know if the current worker shortage will continue.

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